Exclusive: McKinsey’s Global Boss Talks Controversy—and Transparency—With Fortune

March 8, 2019, 11:30 AM UTC
Stuart Isett—Fortune

The leader of one the world’s most influential and secretive consultancies talks about how the firm plans to respond to a wave of criticism of its practices.

Kevin Sneader, less than a year into his role as global managing partner of McKinsey & Co., finds his firm under attack on multiple fronts. The 52-year-old Glaswegian and 30-year veteran of the consultancy has begun to address the criticism, both by granting relatively rare interviews with the news media and within his own firm.

On Thursday, Sneader released a letter to the firm’s U.S. employees, addressing his plan to answer McKinsey’s critics—and reform some of its ways. The day before, he spoke by phone with Fortune Executive Editor Adam Lashinsky. In the conversation below, Sneader divulges quite a few surprises about the privately held firm. What follows is a lightly edited version of the conversation.

Before we dive in, I was thinking that two weeks ago you were in San Francisco, last week you were in New York, and now you’re in Europe. How many air miles did you log last year?

Well, I prefer my wife not to find that out. British Airways had this wonderful idea at the end of the year, which is to send an email that shows all the places you’ve been and the number of times you’ve been around the world. I stayed away from it.

We’ll mark you down as evasive for a legitimate reason on that one. Now, I know we want to talk about the issues that McKinsey has been facing in public and some of the issues around McKinsey’s transparency. I thought I’d start with some framing questions. First of all what were McKinsey’s 2018 revenues and profits?

Our revenue is running about 10 billion U.S. dollars. And as a firm, that’s a global number. So that covers our 65 countries and 141 or 142 locations.

Can you say what the profitability is?

No, this is around the private partnership. It’s not one of the things we do talk about. I am more than happy to talk about revenue. But I think profit is something we won’t disclose.

How about the top five revenue producing clients?

One of the things that we’ve always shied away from is talking about the clients in the sense of revenues because it’s not the way we think about them, and it’s not the way I think our clients think about us. Because what they’re focused on is what we do for them. I’m very happy to talk about the kind of work we do, and the way in which we do that work. But I think at this point, we, unlike for example the advertising world, where they boast about their clients and their revenues and that’s very much a part of how they describe who they are, we’ve always taken a view, that it’s up to our clients to disclose how they see us and what we do for them. What we’re very happy to disclose is kind of the mix of what we do, the nature of that work and be far more open than we have in the past. That’s why I’m on the phone talking to you. But I think actually to disclose who our largest clients, that’s something we’ve not yet got our heads around today.

I think that cuts to the heart of the matter. You are publicly professing a desire to be transparent, but the nature of McKinsey’s very practices and what the services it offers are works against transparency. So perhaps I’ll just ask you how you can be more transparent, and what will you do that is different from what you’ve done in the past?

Well, first of all, I told you our revenue number. So let’s be clear, we’ve already started with one number that we certainly spent no time on in the past. Secondly I think we can be more transparent about ourselves, because I think part of this is the McKinsey organization, who we are, what we do, how we’ve been mysterious.

I’ll just give you an anecdote to bring that home and how far I think we are willing to go versus where we’ve been. When I joined the firm, in London, I remember booking a taxi, and I booked it to the client location, and I was very quickly told you don’t do that. You book the taxi to two blocks away, or as we say in the U.K., ’round the corner. But you certainly never put the client name on a taxi booking.

And that talks to the way in which I think we’ve always thought about guarding client confidences, maintaining their secrets. But I think where the line can get drawn is being very clear that that doesn’t mean we can’t be much more open about who we are. More open about our 2,000 partners worldwide, more open about the leadership of the firm, who it is, how we organize ourselves, the fact that we have six regions, that those regions represent our take on how we divide up the McKinsey world. I think we can be much less mysterious about McKinsey itself.

I’m also happy to give more information, like the kind of work that we do. So for example, sometimes I think the way it’s written you would think that a huge part of our work would be in the public sector. But overwhelmingly, our work is in the private sector, 90% plus.

I have a unique perspective on the kind of work that you do in that I have been on the client side of a McKinsey engagement, when you advised Time Inc., the former owner of Fortune. [Note: McKinsey also is a sponsor of several Fortune conferences.] So I know you do two kinds of work for corporate clients, growth strategy on the one hand, cost-cutting advice on the other hand. Can you tell me what the revenue mix is between those two product lines?

Well, we slice and dice in 90 different ways than you’ve just described. And actually I don’t know that, and I’m not trying to play games here. It’s just not the way we would look at it because we look at it against the different types of work we do, whether it’s strategy, marketing, organization, and so on.

Strategy is about a third of what we do. Organization is probably about half that number. And much of that work would probably fall under what you were describing as growth, but not all of it. We have been a big shift towards growth because of the change in technology. So a lot of work has been about how do we make the most of (business) analytics and related capabilities. Most of that work is growth related. And that’s one of the reasons why a simple cut between growth and costs doesn’t really work. Cost work for many years was a big part of the firm’s activity. And particularly in some different geographies. But I think now there’s really been a shift toward helping our clients with growth because that’s what we’ve been doing over the last few years.

McKinsey has confronted a long list of controversies recently. Let’s address as many as we can, starting with your bankruptcy-advisory business, a separate business from your management-consulting business. You recently agreed to pay a $15 million fine involving an action brought by the U.S. Trustee Program of the Department of Justice. You have said publicly that McKinsey relied on advice for the way it made its disclosures of conflicts, which have been called into question. Whose advice was that?

I want to try and make sure I restate that just to be clear. First of all, we’ve always relied on and been responsive to guidance from the U.S. Trustee and the bankruptcy courts. That’s essentially what I was saying, and we will continue to respond to whatever guidance they provide us. We agreed to that settlement so that we could put that issue behind us, and build or restore what I think we felt we had over the years, which is a collaborative relationship with the U.S. Trustee.

But the Justice Department said in your settlement that McKinsey “lacked candor” in the way that it communicated with clients, and that it made “insufficient disclosure” about its clients and investments. I bring this up because it stands at odds with the entire reputation of McKinsey, which is to use good judgment. They are essentially saying you did not use good judgment, and I’m asking you if you agree with that statement and how you’ll change that.

As I said, one of the main reasons for that settlement is that we respect their views. And we are keen that we move on. So I’m not going to second-guess the statement of the U.S. Trustee.

The New York Times has written extensively about your hedge fund, MIO Partners or the McKinsey Investment Office. It concludes the hedge fund is overly secretive and that it invests in companies that McKinsey does business with. What’s your response?

First and foremost, one of the things we’ve been very clear on from the start is that we respect the right of The New York Times to write up whatever it wants. I think on this one, we believe, and we have asserted consistently, that MIO is a separate subsidiary. It was established 30 years ago.

It’s got a long history. I don’t think it’s particularly secretive. It’s regulated. There’s a lot of oversight of it. But it is separate from our consulting activities. There’s been reports into it that have validated that view. And I think as a result, to be frank, we were disappointed with the way they had described, used examples that in our view were not really relevant to the conversation in terms of talking to the points they were trying to make.

Can you discuss the reports you’re talking about and will you publish them publicly?

We don’t need to because one of them is a report that was commissioned by the Puerto Rico Oversight Board. It’s called the Luskin Report. It was actually published the morning of the New York Times article. It’s a completely independent review commissioned for that entity, not by us. And it had choice words about the independence of the entity called MIO. I just happened to have just picked it up: “McKinsey is acutely aware of the confidential nature of its work. It has organized itself and adopted policies and procedures, which it has enforced and continues to enforce, that are designed to, and in fact do, maintain client confidences, ensuring that information does not leak between the consulting side and the investing side of McKinsey’s business, and minimizes the likelihood of conflicts.” That’s not my words. That’s the word of that independent report. We were disappointed that didn’t get the prominence we would have thought [in The New York Times]. That’s why I think I was frustrated with the way the coverage unfolded.

The Times reported that McKinsey partners or ex-partners make up the majority of the hedge fund’s board of directors. Is that accurate. and won’t that make it impossible to put this question behind you?

I think it’s important to understand what the MIO does and does not do. And there’s a limit to how far I can talk about this because obviously we’re getting into territory where I could venture into some of the issues which are the matter of litigation between us and another party. [Note: Sneader is referring to litigation against the firm brought by Jay Alix, founder of a bankruptcy restructuring firm that competes with McKinsey.]

But I think it’s important to understand what that board does. It only reviews after the fact what has actually happened to the small part of the investments that MIO makes that are actually not covered by fund-of-funds type activity. That covers 90% of the activity. Essentially there’s no investment discretion. And so we’re talking about the balance and in that balance again, it retrospectively looks at what’s happened. So it does not have real oversight into any of the investment decisions that are actually being made.

Would McKinsey consider selling the hedge fund so that it no longer has any relationship with McKinsey, other than a commercial relationship? Because after all, there’s nothing stopping you from investing your partner funds in a hedge fund.

Thirty years ago those options didn’t exist. It’s worth remembering this dates back to when the fund was founded, and remember it was founded to provide a way of ensuring, given that McKinsey partners cannot invest in individual equities, we had a mechanism to ensure that any investment activity was robust and distinct from the day-to-day consulting activities of the firm. Obviously, we should look at anything that helps in that regard, but as you can appreciate, there’s lots of options we could consider. That [selling the fund] could be one of them.

I want to turn to a broad topic that I know is important to you, which has to do with client selection. You’ve taken heat for client work you’ve done in South Africa, in Saudi Arabia, with arms of the U.S. government. Let me start high level. What are McKinsey’s criteria for choosing clients?

There are several criteria. And one of the things that they include is obviously being clear on whether we use this space to make a positive lasting and substantial difference. So are we actually going to be positive impact on what that client does? And really achieve lasting impact. I think that includes being aware of the — be more aware than we were in the past, so this is one of the issues I’m certainly looking at hard and we’re looking at hard: How do we make sure that we don’t just take a narrow lens to that, but that we understand the social impact, the second order effects of being involved with any client?

And so that’s one of the things we’re really looking to add more emphasis towards, and I think it’s one of the points that I’ve repeatedly made is when we look at the criticism, which dates back over decades, we’ve made mistakes in some places. And one of the things is to broaden that definition of how we think about the role we play with a client, and frankly, be more aware of the environment and the context in which we’re serving clients. Because that is part of what creates some of the issues that we’ve run into.

Why don’t you take a moment and be more specific, because while that’s interesting it’s also general, and perhaps you might address something that would constitute a no-go zone for McKinsey engagement?

First and foremost, when we think about serving clients, we are very keen to understand their integrity, who they are individually and institutionally, and that is absolutely one of the criteria we apply. And if I look at some of the mistakes we made in South Africa, to be fair, perhaps one of the biggest mistakes was allowing ourselves to be associated, in this case, not with our client so much, but with a third-party that we never engaged with, but was engaged by the client.

A second example is to look at clients and situations where it gets us into I would say territory that is fundamentally political or in some way creates some real problem when we want to make sure that we are working in areas where we’re making a positive contribution. So for example, I’m proud of the work we do in economic development. I’m proud of the work we do in employment, I’m proud of the work we do in education. I want to make sure that if we’re working in other areas, we’re very clear on the conditions on which we work, and we’re not going to get ourselves into areas that are not good.

So if you take the Saudi Arabian situation, to be specific, the document that was produced, that was a mistake. [Note: Sneader is referring to a report on reaction to Saudi economic policies that identified critics of the Saudi government based on their social media commentary.] The document, to be clear, was not produced for a government entity. But it did talk about, and it used, analytical techniques to talk about the way in which individuals had reacted to that government’s austerity measures that should not have happened. And the actions we’re taking are designed to ensure that does not happen again.

You mentioned in a recent television interview that your client in Saudi Arabia was not the Interior Ministry or the Defense Ministry. Who was the client?

There was no client. Let me explain. It was an internal McKinsey document that was produced by a colleague to showcase how you can apply analytic techniques to social media. What’s got lost in all of this is it was not produced for the government. And secondly, of course by using public data it was highlighting people who between them had something like — I think it was 800,000 tweets, I might get that number wrong — but a huge number of public utterances in the form of tweets. This was not identifying people who were lying low. I’m not excusing it. It should not have happened. It’s that kind of thing, which is clearly a mistake, and we shouldn’t have been doing it. But it was not for the government.

Have you undertaken or will you undertake a top-to-bottom review of every existing client engagement to determine if each one meets your new standards?

The short version of that is one of the things we are finalizing. We’re working right now to put together a new set of ways in which we evaluate clients. And indeed not just clients, because it could also be the individual topic in which you’re working on, not just the client themselves. We are intent on applying that to our full client portfolio. And so the short answer to your question is yes, we will apply that framework to both existing clients and new clients. Many of those existing clients are in large established geographies with high degrees of oversight already. So our priority is to work on this in areas where we think there are more controversial topics or geographies, and to make sure we apply it to those first.

Do you anticipate, and would you be comfortable with, that resulting in a short-term decrease in firm revenues?

Yes. Of course. Our intent is to make sure we feel comfortable and confident about the work we’re doing. And selecting the right clients is a key part of that work. And if the consequence of that is in the near-term we have to make some real changes, then we’re prepared to do that, yes.

You made an interesting point, that the vast majority of your clients exist in circumstances where they are either regulated or otherwise have oversight from either government agencies or standards-setting bodies, and so on. McKinsey largely has none of that oversight. Do you see a scenario where McKinsey and other management consulting firms do have some kind of outside oversight and scrutiny of its actions?

First of all, we feel a lot of scrutiny, and that scrutiny first and foremost is from our clients. But it also comes from the outside world in many different forms, whether it’s media or the fact we do operate in areas that are regulated, as you’ve already pointed out in some of the questions you asked me at the beginning.

Has McKinsey suffered a hit to its reputation because of the various topics we’ve been discussing?

Our reputation is made every day when five-and-a-half thousand McKinsey teams go to serve their clients. One of the things I’ve been very struck by in recent weeks is the response of our clients who are standing by us and standing with us. And if anything, they’ve been urging us to be more willing to go on the record. I had one CEO almost in tears saying to me, You do realize how you have kept this company alive and this town, this city in the Midwest of America, has a major employer that otherwise would have gone under because it was competing in the steel sector where things are pretty rough at the moment. And so as a result I think it’s important for us to remind ourselves that our reputation is first and foremost built by what our clients say about us. And they’re saying I think what they’ve always said: ‘We know our McKinsey team, we trust them, we believe in them.’

The second thing it’s built from what our recruits think of us, and one of the things that I’ve been very struck by is about — just got the numbers. We’ve had one of our best recruiting seasons, and it’s been right in the midst of all this media publicity. If you ask why that is, it’s not because the young people we recruit don’t have high ideals and believe in the importance of business behaving in a way that we all can be proud of. It’s because they see us engaging with them, being open about the fact we’ve made mistakes, and really being willing to look very hard at what we do, and ask tough questions about it.

So have we taken a hit. Of course. But I know, and I’m really confident that actually what we’ll do is show that we hear, we’re listening, we’re acting, and I really believe that when we come back, we’ll come back stronger because we’ll redefine and raise the bar on what it means to be a professional, at a time of great change, not just for us, but for business as a whole.

A version of this article appears in the April 2019 issue of Fortune with the headline “Q+A: Kevin Sneader.”

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